'Buy now, pay later' could bring the country to the brink of insolvency

Thursday 28 December 2006 23:52 BST

Spend, spend, spend may becoming home to roost

The biggest debt burden of any major economy will push 150,000 Britons into insolvency next year, according to alarming new research. The respected Organisation for Economic Co-operation and Development estimated that average families' borrowings have now surged to well over one and a half times annual incomes, the highest of any member of the elite Group of Seven nations.

Separate research from accountants KPMG calculated personal insolvencies will soar to 110,000 this year, compared with 67,600 in 2005.

The figure will rise even further in the New Year - partly because of the growth in Individual Voluntary Arrangements (IVAs), a softer form of bankruptcy.

The reports will add to fears that Britain's "buy now, pay later" culture - evident in this week's Boxing Day shopping frenzy - could threaten the country with financial meltdown.

Families have racked up a record £1.3 trillion of debts, fuelled by easy availability of credit, but they face a painful squeeze as borrowing costs mount.

Mark Sands, director of personal insolvency at KPMG said: "We will continue to see very high personal insolvencies for the forseeable future. This is not something that is going to go away.

"The British attitude to debt changed some years ago, when we saw an increase in consumer debt to beyond £1 trillion. Now we are seeing a change in people's attitude towards reneging on their debt. That is a cultural change that is now embedded in the population."

His firm estimates that over 3,000 people who entered IVAs had debts exceeding £100,000 this year. Lenders will be forced to write off a massive £1.3 billion of consumer debts this year because of the growing popularity of the deals, which allow borrowers to wriggle out of their problems while paying off only a fraction of their loans, KPMG warned. The OECD research, released on the organisation's website, showed that household debt has risen to record levels in many countries around the world.

But it warned that in nations such as Britain households are particularly "vulnerable" because their debts are rising faster than the value of their houses. Household debt has risen to 159 per cent of average incomes in the UK, the OECD said, higher than in the US, Japan, Germany, France, Italy and Canada. The level stood at only 106 per cent in 1995, before Labour came to power. Annual repayments of interest and capital on loans in Britain are nearing their highest levels since the aftermath of the recession of the early 1990s, the OECD added. This has left many borrowers badly exposed to any "sharp rise" in interest rates.

While rate cuts would alleviate some of the problem, economist Alan Clarke of investment bank BNP Paribas warned the Bank of England will be reluctant to encourage the build-up of even more debt by easing the cost of borrowing too quickly. "They are not going to give people with too much debt an easier ride," he said. "The burden of interest payments is rising and has not fully bitten yet. The headwinds from that will increase in the New Year, because of the effect of two Bank of England rate hikes." National charity Citizens Advice said it dealt with 1.4 million new debt problems in 2006, the equivalent of 5,300 every working day. The group urged people to rein in their borrowing in the New Year to avoid a debt "hangover" from Christmas. Teresa Perchard, Director of Policy for Citizens Advice said: "By carrying out a regular financial overhaul and taking some preventative measures, many problems could be averted before they become crises. Traditionally people make New Year's resolutions to change bad habits - we're urging people to do the same with their finances."